The potential costs and benefits of unifying North and South Korea

Kim Jong-Un, North Korea’s leader, has been getting more aggressive with missile tests and rhetoric recently. (Reuters)

Tensions have escalated between North Korea and the U.S. as Kim Jong Un and President Donald Trump continue to spar following new sanctions imposed by the U.N. However, world financial markets have so far been only mildly affected by the news given the historical default to diplomacy.

But what if war does break out? A military conflict would clearly mean significant problems in the near-term, especially when you consider that nuclear weapons could be involved.

The story regarding the long term is much less certain. According to recent analysis from Capital Economics, it is possible that the fall of North Korean supreme leader Kim Jong Un could be a net positive for what may become a unified Korean economy, depending entirely on how grave the means are to accomplish this end. Their estimate for the cost of unifying the two Koreas: $1 trillion.

Why South Korea would want to unify with North Korea

The best-case scenario, as Yahoo Finance has written before, is something akin to the reunification of Germany in 1990. South Korea would likely benefit economically in the long run, according to a report from Capital Economics. Like Japan and many European countries, South Korea has a population that is fairly old with the median age 41.2. North Korea, however, is a much younger country with the median age of 33. In a peaceful transition, this would breathe youth back into the workforce and improve the South’s demographic outlook.

Youth isn’t the North’s only natural resource — it’s home to the Korean peninsula’s greatest wealth of untouched raw materials. For South Korea, access would push down the need to import and provide it with cheaper building blocks for its strong manufacturing industry.

Besides the utilization of North Korea’s potential, a unified Korea could benefit significantly from lower military expenses, which cost both countries dearly. That money would be freed up for other projects.

Uncertainty is very high

Everything depends on how bad a military conflict would be. Analysts expect it to be short but extremely brutal. The South’s largest city, Seoul, is just 35 miles from the border, and massive losses of life and infrastructure have the potential to cripple both countries to a degree never seen before. The effects would reverberate across the world, and damage to South Korea’s role in global supply chains and hits to financial markets would be the least of anybody’s concerns.

Given all this uncertainty, the Capital Economics analysis affixed a big asterisk next to the cost of reconstruction. Nevertheless, they offer a rough estimate of $1 trillion, which is three times the cost of the German reunification and is the same as one year of the South’s GDP. It is not cheap to rebuild a destroyed economy, and many things can never be rebuilt.

Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, tech, and personal finance. Follow him on Twitter@ewolffmann. Got a tip? Send it to tips@yahoo-inc.com.